How CPAs Can Protect Baby Boomers' Nest Eggs from Derailers

Unexpected life or economic events are causing both short- and long-term damage to the retirement savings of baby boomers in America, according to a recent survey by Ameriprise Financial Inc. But there are strategies CPAs can implement to stop the bleeding and allow their baby boomer clients to live comfortably in their retirement.

Ninety percent of Americans ages fifty to seventy with $100,000 or more in investable and retirement assets have experienced at least one event, or "derailer", that has made an impact on their retirement savings goal, according to Ameriprise Financial's Retirement Derailers survey. The average respondent experienced four of these events, which range from effects of the recession to family and lifestyle choices that have lasting financial consequences.

These derailers have set baby boomers back an average of $117,000; in fact, nearly two in five respondents (37 percent) experienced five or more unanticipated events, costing them approximately $144,000.

While the percentage of baby boomers who have faced five or more of these events may seem surprisingly high, it's really not all that uncommon, especially when potential derailers occur from sources outside of the family's home, Jeff Magson, vice president of sales and platforms for 1st Global in Dallas, told AccountingWEB. For example, nearly one in four (23 percent) of survey respondents are supporting a grown child or grandchild.

"When you start involving kids or kids-in-law or even businesses that are outside of the household, you're taking on a lot more risk in having all of those relationships", Magson said. "I can think of a handful of people who I know in my life who have had their kids move back in with them or have had to step up to help a child or family member who was involved in a lawsuit or some sort of legal proceeding that exhausted their resources because the legal costs were staggering."

According to the survey, the top three most cited derailers are, not surprisingly, related to the recession.

55 percent say their savings were significantly lowered due to market declines.

33 percent admit their home equity isn't going to help fund retirement as much as they expected.

Additionally, one in five respondents' retirement goals have been thrown off track due to making bad investments (22 percent); taking Social Security before retirement age (19 percent); and/or experiencing a job loss (18 percent).

"If you've experienced a derailer in your thirties or forties, you've got plenty of time to make up for it. But baby boomers have given up their ability to save money because they're retired", Magson said. "Baby boomers need to do whatever they can to save, because they simply don't have a lot of options for recouping that money. Entering the workforce in their sixties would be challenging – both emotionally and for actually finding a job in this economy."

Three Strategies to Protect Baby Boomers' Savings

If CPAs want to make a difference in the lives of their baby boomer clients and protect them from possible derailers, Magson said they should do the following three things:

Take a leadership role.

Use a financial planning system to identify risks and solutions.

Educate clients' children on the basics of financial planning.

1. Take a leadership role: Although there are many definitions of leadership, the one that stands out for Magson is when a person partners with someone else to achieve a goal that couldn't be achieved on his or her own. In this case, baby boomers partnering with a CPA to achieve their financial goals.

According to the survey, 42 percent of respondents rely on a financial advisor to get their retirement finances back on track. Those who work with a financial advisor are much more likely than those who don't to have a written financial plan (74 percent versus 39 percent).

"CPAs are ranked extremely high as a trusted service provider on surveys, right up there with clergy and police officers and other trust professions", Magson said. "They have a responsibility to leverage that trust by taking a position of leadership and having the courage to address some of these potentially emotional topics with their clients."

2. Use a financial planning system to identify risks and solutions: Magson said CPAs should use a financial planning tool to show their clients how prepared they are financially to deal with unexpected events that could hamper their savings efforts.

1st Global offers a software program called Sustainable Income Solutions that's specifically designed for CPAs to assess several different risks that can take a toll on a retirement plan, Magson said.

"It's almost like a retirement stress test", he added. "You can toggle up or down and show your clients the things that could go right or wrong in retirement. Some of the risks could be helping out a child, inflation, market risk, or long-term care – the effects of an unexpected illness or injury. CPAs can put these risks in as a one-time expense and show their clients what that expense would do to their retirement nest egg and how much less they could take out each month and not run out of money."

The risk management conversation would be different with a client who has never been affected by a derailer versus a client who has.

"Simply open that discussion by asking this question: Have you ever experienced something like this, or are you close with someone who has? Trying to understand what the client's perspective is of the magnitude or probability of a derailer happening is a good start", Magson said. "If someone has had a derailer in the past, it probably expedites the discussion on solutions because he or she has seen this happen before. Folks who have had an experience with a derailer probably are more likely to talk about it."

3. Educate clients' children on the basics of financial planning: One aspect of the Ameriprise Financial survey that fascinated Magson was how kids can be a potential derailer to their parents' savings. He said CPAs can have a basic financial planning conversation with baby boomer clients and their children to help the kids become better financial decision makers.

"I wouldn't recommend that the CPA approach the conversation with the kids as a way to protect their parents", Magson said. "Instead, I would approach it by saying, 'Your parents, who have done well financially, have asked me to talk to you about how you can make the same types of decisions that they've made so you can be as successful as they are.' Then you would follow the same basic course for your financial planning discussion."

"People talk about setting aside three months of expenses as a good savings. That's not a good savings; it's a good start", he said. "People are out of work now for six months to a year. Having a conversation about having liquidity that can sustain a family up to a year makes more sense in this day and age. It's hard to get there; I understand that. But every day that you put something toward that yearlong goal is one more day that you're safe should anything happen."

About the survey:

The Retirement Derailers survey was created by Ameriprise Financial Inc. utilizing survey responses from 1,000 employed and retired Americans ages fifty to seventy. All respondents have investable assets of at least $100,000 (including employer retirement plans, but not real estate). The survey was commissioned by Ameriprise Financial and conducted via telephone interviews by Koski Research from February 21 to February 28.